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Is a Service Contract a Waste of Money?

What you need to know before you sign up

Who will provide the service? A number of third-party companies offer extended warranties. While most are reliable, it's probably better if the extended coverage is provided by the manufacturer or the retailer. There is little or no recourse for consumers who hold service contracts with companies that go out of business.

Check the company's reputation by asking your Better Business Bureau, consumer protection office or state insurance commission about complaints.

Is my new purchase likely to fail? A service contract may be a waste of money if what you're buying is unlikely to need servicing. Although there is no consensus among the experts on which appliances deserve service contracts, here are some generalities that are widely accepted:

  • Central air conditioners, because of the high cost of repairs and their essential need in hot weather, are popular candidates for extended warranties. So are mechanical appliances that do hard physical work and have lots of moving parts, such as clothes washers and dishwashers. "Clothes dryers have lower failure rates and usually don't need coverage by a service agreement," says Landers.
  • Modern electronic products such as flat-screen television sets have become so reliable that extended warranties are seldom worthwhile. A TV set that makes it past the manufacturer's one-year warranty without a failure is likely to continue on for years without a problem. Among the exceptions in this category are laptop computers. Because of their portability and exposure to damage, you may want to consider an extended warranty.
  • When it comes to new cars, the trend toward greatly extended original warranties is making the cost of service contracts an unnecessary expense in most cases.

You may also like: Have a complaint for customer service? >>

William J. Lynott is an author and freelance writer who specializes in business and financial issues.

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